Gun-jumping: A false start with unforeseen consequences? An overview of the most important current developments.
The competition authorities of the EU Member States as well as the European Commission (“Commission”) have recently carried out more proceedings in connection with what is known as gun jumping. The term, which in track-and-field events describes a false start by a runner, refers to a breach of the standstill obligation in the context of merger control – which can have serious consequences.
What are the risks in transactions?
The standstill obligation is laid down both in European merger control in Art. 7 of Regulation (EC) No 139/2004 (“Merger Regulation”) and in German merger control in section 41 (1) German Act against Restraints of Competition (ARC). It forbids the parties to a notifiable transaction from implementing it before the Commission and/or the German Federal Cartel Office have cleared it following filing and review. The aim is to prevent the emergence of potentially competitively harmful market structures, since their subsequent dissolution can prove difficult. A breach of the standstill obligation can lead to far-reaching consequences for companies. Firstly, the legal transactions which breach the standstill obligation are initially invalid. Secondly, such a breach can lead to a fine of up to 10 % of the gross income of the company concerned.
The fact that the competition authorities are taking such breaches increasingly seriously was proven once again by the Commission with its decision against the multinational cable and telecommunications enterprise Altice (Netherlands). Due to a breach of the standstill obligation in the Commission’s view, it imposed a record fine of EUR 124.5 million (see our previous article of 3 August 2018).
Where is the boundary?
While an act of implementation upon transfer of the acquired shares or upon takeover of the management is obvious, the evaluation of other measures before clearance by the competition authorities can be very difficult in certain cases. The distinction between permissible preparatory actions and prohibited gun jumping is anything but clear at least in the case law of the courts and the decision practice of the authorities – this applies to both European and national level. Companies therefore often face the question in the context of transactions of the exact extent of the standstill obligation. In particular given the possibly serious imposition of fines, it is crucial from the perspective of the companies concerned not to end up in the sights of the competition authorities in this grey area.
The European level: New guidelines, but still no clarity
The European Court of Justice (“ECJ”) dealt in a preliminary ruling procedure in the matter of Ernst & Young/KPMG (ECJ, ruling of 31 May 2018, C-633/16 – Ernst & Young) with the proposed merger of the auditing firms Ernst & Young (“EY”) and KPMG Denmark (“KPMG DK”). KPMG DK announced on the occasion of the transaction – but before it was cleared – that it would terminate its cooperation agreement with KPMG International. The Danish Competition and Consumer Authority (“DCCA”) saw this already as a breach of the standstill obligation. The DCCA based its decision on an overall evaluation of the circumstances, according to which the termination of the cooperation agreement had a close connection with the merger, was irreversible, and had been capable of affecting the market in the period between termination and the clearance of the merger.
The ECJ, however, in its interpretation of Art. 7 Merger Regulation, arrived at the conclusion that a merger is implemented only by a procedure that wholly or partly, actually or legally contributes to a change of control over the target company. Regarding EY and KPMG DK, the ECJ did not consider this criterion met – in line with the Opinion of Advocate General Wahl. It therefore did not consider the termination of the cooperation agreement as gun jumping. Instead, the ECJ held the view that the termination may have accompanied and prepared for the merger, but as such it did not contribute to a permanent change of control over the target company.
The Danish court, which had submitted the question of the extent of the standstill obligation to the ECJ, has now recently confirmed this and overturned the decision of the Danish competition authority.
The Altice case, however, which the Commission dealt with, was somewhat different: The takeover agreement in question included provisions which gave Altice the right to exercise decisive influence over PT Portugal, such as veto rights against decisions in the normal business activity of PT Portugal. According to the broad understanding of the Commission, the mere possibility of exerting a controlling influence is already sufficient to be able to assume a breach of the standstill obligation. It is not necessary that use actually be made of this possibility. In addition, the Commission also found that in certain cases Altice had actually made use of the possibility of exerting a decisive influence over certain parts of the business activity of PT Portugal. This was done for example in the form of instructions to PT Portugal on conducting an advertising campaign and via the requested exchange of detailed, sensitive business information without any confidentiality agreement.
The Commission recognised in principle the need for regulations in takeover agreements intended to guarantee the preservation of the value of the target company and thus the purpose of the transaction. However, such clauses are to be clearly limited to the necessary extent to avoid jeopardising the company value. Any additional regulatory content, which also intervenes in particular in the everyday business of the target company (known as (ordinary) conduct of business clauses) is therefore disproportionate.
Altice has lodged an appeal against the Commission’s decision. The action is based on, inter alia, the grounds that the implementation of a merger requires more than the mere possibility of exercising decisive influence over a company. Altice also refuses to accept the Commission’s finding that it actually exercised decisive influence over PT Portugal.
In this respect the scope of the standstill obligation at a European level is still not finally clarified, and so the decision of the General Court (“GC”) in Altice is eagerly anticipated.
Member State level: A broad interpretation of the standstill obligation
At national level, too, imponderables arise for companies in the context of proposed transactions. The standstill obligation in the individual Member States is in some cases interpreted much more broadly than at European level.
In the Edeka/Kaiser’s-Tengelmann case (German Federal Court of Justice, decision of 14 November 2017, KVR 57/16) the German Federal Court of Justice (“FCJ”) held the view that a breach of the standstill obligation does not necessarily require the purchaser to attain control over the target company or substantial competitive influence over it. Instead, it is sufficient that the purchaser receives powers in advance which it could exercise only by virtue of its position as owner of the shares and shareholder rights after the proposed transaction.
Also in transactions with a connection to France, a stricter standard regarding the stand-still obligation imposed by the Autorité de la concurrence (“AC”) must be complied with. For example, the AC imposed a fine of EUR 80 million, also on the Altice Group. It regarded the preparation and planning of a new online offering as well as joint procurement planning and calls for tenders as inadmissible, although the effective implementation of these activities in the market only took place after clearance. These measures were sufficient, according to the AC, to exert substantial influence over the target company and to facilitate an exchange of competitively sensitive information.
Thus it is worth noting that in some cases a stricter standard regarding gun-jumping measures is applied in the Member States than at European level.
The question therefore arises for companies, especially in the context of transnational transactions, of how in practice the unclear extent as well as the discrepancy between national and European levels should be handled in the future. Assessing which measures are still to be regarded as permissible preparatory acts and which are not, will only be possible with consideration of all circumstances of each individual case and with careful analysis.
Any questions? Please contact: Sarah Blazek and Patrick Kalina
Practice Groups: Antitrust & Competition, Regulatory & Governmental Affairs